THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Sunday, January 26, 1997 TAG: 9701240031
SECTION: COMMENTARY PAGE: J5 EDITION: FINAL
TYPE: Opinion
SOURCE: By JOHN T. HAZEL JR.
LENGTH: 93 lines
No matter how the numbers are calculated, Virginia has a structural budget deficit. This budget situation is not a single-year shortfall in revenues, which might occur as the result of a natural disaster, or a new mandate from the federal government, or even from a sluggish economy. Rather, a structural deficit is an ongoing condition in which normal general fund tax revenues from the existing fiscal year are less than total spending. Because Virginia must have a balanced budget, this gap - the operating deficit - must be closed.
Since the recession of the early 1990s, a significant gap has existed between tax revenues and expenditures. Thus far, lawmakers have bridged the gap by relying on lottery profits, unspent balances from the previous year, debt financing for capital needs, and quick fixes such as deferred implementation of tax breaks, the sale of assets, and, most recently, anticipated proceeds from Trigon's conversion to a stock company. The continuing need to balance the budget with these stop-gap measures confirms the structural deficit and underscores the fragile nature of Virginia's finances.
Reliance on lottery profits. Since 1991, state officials have averted deeper budget cuts by transferring non-tax sources into the general fund. A major component of these annual transfers is lottery profits, which average more than $340 million a year. This action overturned lawmakers' agreement when the lottery was enacted in 1989 to dedicate lottery profits to a capital fund for priority construction.
Today lottery profits constitute the fourth largest source of state funds. lottery.
Use of year-end balances and one-time revenues. Uncommitted cash balances at year end are a significant measure of a state's fiscal health, reflecting a surplus of revenues over spending. These balances are traditionally available for new projects and programs. Many states use balances as cushions for future uncertainties or for capital projects, on the theory that one-time funds should be used for one-time, nonrecurring expenses.
In the 1990s, Virginia has relied heavily on uncommitted balances from one fiscal year to prop up the next year's spending. . . . The most alarming feature of Virginia's practice of this (and other) one-time measures is that they are used to fund a growing base of essential operating expenses that cannot be sustained without them.
Increased dependence on debt. Largely as a result of shifting lottery proceeds from capital funding to the operating budget, it has become necessary to borrow funds for nearly all capital needs. Over the past 10 years, we have all but abandoned our historical practice of paying cash for constructing and improving state facilities. . . . Although Virginia's debt level is in line with other AAA states, we cannot maintain an AAA bond rating indefinitely if we continue to authorize and issue debt at the pace and level we have since 1990.
The spending side of the equation: many needs identified. The evidence is compelling and irrefutable. The demand for state funding will grow considerably faster than resources. The resulting pinch will be especially painful, because the battle for funds will be fought over the relatively small portion of state spending that is not mandated by state or federal law. This means the outlook is very bleak for critical programs like higher education, transportation, parks, the environment, the arts, and state aid to local governments.
Stewardship of public funds requires both prudent and necessary spending. The evidence is building that some pressing needs for more funding have been too long ignored. Where the funding supports programs that enhance individual achievement and economic prosperity, stewardship requires an in-depth assessment of needs and a plan to address them.
Out-of-date tax structure. Virginia's - and most other states' - revenue systems were designed decades ago in an economy that was based on manufacturing, mining, and agriculture. But economic activity then was very different from economic activity today. Governments have failed to get their arms around the new economic drivers in the services, knowledge and telecommunications industries. In Virginia, experts estimate that our current tax structure does not apply to 60 percent of the state's economic activity - and that percentage is growing.
If Virginia merely stays on its current path of modest revenue growth, depressed spending, the use of the lottery and one-time sources to prop up tax collections, it is not possible for the state to meet future commitments without making massive cuts to existing services or eliminating programs altogether. If the fiscal scales tip slightly in the wrong direction, Virginia's already fragile fiscal condition will become disastrous. MEMO: An excerpt from ``Virginia's Fiscal Dilemma: How to Pay for
Prosperity in the Old Dominion.'' It appears in the January issue of the
University of Virginia Newsletter, published by the Weldon Cooper Center
for Public Service. The author is a Northern Virginia lawyer and
developer and chairman of the Virginia Business Higher Education
Council.